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Upsurge Reported in Local Tech M&A Deals / Mass High Tech

10/10/2005 - Mass High Tech
With a lukewarm IPO market and several industries experiencing consolidation as the economy picks up, mergers and acquisitions are increasing both in number and value. In some industries, such as software, the increase in local M&A activity has grown as much as 30 percent over the past year.

Among middle-market technology companies, those valued at under $100 million, M&A in general is skyrocketing. In Massachusetts, one-half of all the mergers this year have been technology-related, a 20 percent increase from the same period last year, according to data from Capital IQ and Mirus Capital Advisors, a Boston investment bank that specializes in M&A work.

"We"re at the highest point in 12 months,"� said Elliot Williams, president of Mirus Capital Advisors and the Boston chapter of the Association for Corporate Growth. "Technology was hurting for some time, and New England got hit hard in the early 2000s. I think it"s starting to come around, and come around quickly."�

Only two segments lost ground since last year: electronic equipment and IT services. The electronic equipment and instruments sector fell by 5 percent, while the IT services sector was hit hard, with a 36-percent drop.

Newer sectors, however, have picked up the slack. The database marketing and media technology industries have been particularly active. Database marketers Optus Inc. of Woburn, BeNOW Inc. of Wakefield and ClickZ Inc. of Andover were all acquired in the past two months by larger, publicly traded companies (Dentrite International Inc., Equifax Inc. and Incisive Media PLC, respectively). Recently acquired media companies include TechOnline Inc. of Bedford, Analyst Views of Needham and Virtual Text Inc. of Sudbury.

The increase in M&A activity represents a rebound in the tech sector, but there is no single force driving it, experts said. Rather, it"s a combination of factors: A poor IPO market, a maturing tech industry and industry-specific strategies joining to make M&A the liquidity event of choice, said Peter Falvey, managing director and co-founder of Boston investment bank Revolution Partners.

Telecommunications, for example, saw an 8 percent to 10 percent increase year over year, but that could rise even more going forward, Falvey suggested. "Infrastructure and telecom, including data storage, should get better,"� said Falvey. "The telecom industry got hit harder than software during the downturn and it is starting to turn around."�

Peter Alternative, a principal at Mirus, also cites positive cash flows as a driver in such industries as software. With an abundance of cash on their balance sheets, companies have the means to expand through acquisition, said Alternative.

There has been an increase in the numbers of both private equity investors and corporate acquirers, according to Kevin Barry, a partner in the corporate group of Boston law firm Bingham McCutchen LLP. Companies such as Oracle or Computer Associates have cash on hand and are looking to boost their revenue streams, he said.

Also, the rise in government regulations has taken the bloom off the IPO rose, he added. "I do think that Sarbanes-Oxley has made it expensive to go public,"� Barry said. "Many companies looking for liquidity are creating a dual track for themselves: they"re drafting the registration statement (to go public) at the same time they"re seeking M&A transactions. If the valuations are similar, companies will often prefer an M&A transaction. ... They get the money in their hands quicker."�

As individual sectors grow, the tech business economy as a whole is maturing. Ongoing consolidation will help that process, stabilizing the industry and pulling it alongside more mature markets, say investment bankers.

"The pace of consolidation is quickening across many sectors,"� said Williams. "Aided by a growing economy and interest from foreign acquirers, valuations have improved steadily without becoming overheated, and we expect this pace to continue through 2006.


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